Tuesday, January 26, 2010

The Cure For The Crisis Was To Add More Disease

During the financial meltdown in the fall of 2008, central banks around the world — led by the Fed — pumped huge amounts of liquidity in the world financial system to stave off collapse. Much of the money was doled out to the biggest banks. Whatever wasn't printed out of thin air was financed through bond sales.

But the origin of the crisis was debt, and that problem has never been solved. It was just papered over by an absolutely massive government intervention.

The U.S. government, like others around the world, bailed out over-leveraged banks and initiated stimulus programs with borrowed money in the form of bonds. That simply deepened the debt problem and pushed it off into the future. In effect, while treating the symptoms, the disease itself was fueled.

For now, the U.S. continues to assume — or hope — that investors will continue to buy the bonds that finance its habitual deficit spending. That assumption may be overly optimistic.

In a recent discussion on the global role of the US dollar, Zhu Min, deputy governor of the People’s Bank of China, told an academic audience that, “The world does not have so much money to buy more US Treasuries.” He went on to say, “The United States cannot force foreign governments to increase their holdings of Treasuries… Double the holdings? It is definitely impossible.”

With interest rates near zero, a national debt exceeding $12 trillion (a sum so large that it can never be repaid), and a dangerously loose monetary policy, why would foreign governments, or citizens, maintain their faith in the U.S. and continue loaning it such massive sums of money?

What's more, the dollar has been in steady decline for years, causing it to lose value in relationship to foreign currencies. This has effectively increased the price of imports and resulted in Americans buying fewer foreign goods. That means there are fewer dollars available for foreigners to purchase future Treasury securities.

However, the weak dollar has tempted foreign investors, and even central banks, to pour their money into the stock market, excessively inflating its value. It is presently trading at 20 times earnings.

Though the dollar increased by 40 percent between 1995 and 2002, it then began a descent in 2003. That ultimately resulted in a 21 percent decline over the last decade, measured against a basket of six other currencies. Only a perceived flight to safety during the 2008 credit crisis kept the dollar's performance from being even worse.

But the dollar's decline in the last decade was only part of a much longer trend. Over the 25-year period since 1985, the dollar has lost more than half of its value.

That has not gone unnoticed. According to the IMF, around 40% of global reserves are now in dollars compared to 55% a decade ago. The difference has been lost to a range of currencies such as the euro, the yen, and particularly the Swiss franc.

Meanwhile, China has been adding to its gold holdings as an alternative to the dollar, which has clearly been losing favor.

Since the end of WWII, the U.S. has had the unique and extraordinary privilege of being the issuer of the world’s reserve currency. That position inspired confidence in the rest of the world and compelled them to buy our bonds. But those bonds look a lot less appealing these days.

The U.S. sold $2.1 trillion of notes and bonds last year. However, Treasuries were the worst performing sovereign debt market in 2009, losing 3.5%, on average. That won't encourage buyers this year. And the low yield on Treasuries only serves to further diminish their appeal.

Australia and Norway have already begun to raise interest rates, making their bonds more alluring to investors. And other central banks are expected to follow early this year. The Federal Reserve will try to hold the line in a futile effort to stimulate the U.S. economy. But sooner or later, it will have to cave to the demands of investors.

When the Fed eventually does raise rates, it will have a variety of consequences. Rising market interest rates automatically devalue older bonds issued at lower fixed rates. That will be none too pleasing to current holders of Treasuries.

Yet it appears that there may not be nearly as many of those bond holders as the Treasury would have us believe.

Last month, Sprott Asset Management told its investors that the Treasury is essentially creating its own debt market by conjuring up phony investors. According to Treasury data, a group cryptically referred to as "other investors" purchased $510 billion of Treasuries in just the first three quarters of last year, after buying just $90 billion in 2008.

This makes no sense whatsoever. Who on the planet, in these times, could afford to — or be willing to — increase their Treasury holdings more than five-fold, year-over-year? The whole claim appears to be a ruse for the Fed, as it printed half a trillion dollars to buy Treasuries.

So it's just a Ponzi, or pyramid, scheme. And like all, it's doomed to collapse.

By Sprott's analysis, America isn't finding enough investors to buy its massive supply of bonds. China's warning that there isn't enough money in the whole world to support the U.S.'s enormous appetite for debt sales seems accurate.

But the U.S. is not alone in its monumental debt problem.

If Portugal, Ireland, Iceland, Greece or Spain (known as the PIIGS) should default on their debt this year, or next, it could prove to be the canary in the coal mine for the rest of the world, including the U.S.

Ultimately, nothing has changed. The solution to the credit / financial crisis simply amounted to rearranging the deck chairs on the Titanic; nothing is different, except appearances. In the meantime, the problem of unsustainable debt has only grown worse, except that now much of the burden has been shifted to the taxpayers.

Politicians may crow about the need to reduce spending, but that won't get at the structural deficits that we are stuck with. And "pay as you go" won't chip away at our staggering debt burden, or pay the whopping interest payments on that debt.

As stated, our problems are structural, and they will haunt us for years to come.

Sunday, January 24, 2010

Populism Rising Against Bernanke

There is so much populist rage against Wall Street, that Ben Bernanke's confirmation -- once thought to be a foregone conclusion -- is now in jeopardy.

Senators of all stripes have publicly stated that they will vote against Bernanke. These include Independent Bernie Sanders, Democrats Russ Feingold, Barbara Boxex, and Byron Dorgan, plus Republicans Richard Shelby, David Vitter, Jim Bunning, John Cornyn, and Jim DeMint.

All told, at least 17 senators have indicated they'll vote against Bernanke, according to Reuters.

It seems that Scott Brown's victory this week has senators fearing a backlash, and consequently no Senate seat is deemed safe this fall.

Simply opposing President Obama may be the motivation of the Republicans. But many senators may seek to appear allied with ordinary Americans disgusted with Wall Street's greed and manipulation.

No Fed chairman has been rejected by the Senate. Sixteen senators opposed Paul Volcker in 1983, the most "no" votes ever cast against a Fed chairman. He was eventually confirmed by a vote of 84-16.

But more Americans than ever are dubious about the Fed's role, its intentions, and whether it really cares about the interests of the American people.

A recent poll found that 47 percent of Americans think Bernanke cares more about Wall Street than Main Street, while only 20 percent think he works for Main Street. Independents, who swung heavily for Brown in Massachusetts, are even more opposed to Bernanke than Democrats or Republicans. Fifty percent of independents think he cares first about Wall Street; 15 percent think he prioritizes the needs of Main Street.

The rising tide of voter rage may result in a growing sense populism in Washington.

But the Fed's spin machine is working hard to spread fear of a double-dip recession, and a stock market collapse, should Bernanke be defeated.

The amount of fear-mongering being spewed is remarkable. As the spin goes, if Bernanke goes down businesses will cut spending and investing, and stop hiring. Higher interest rates and inflation will follow. Uncertainty, anxiety, and shaken confidence will spread like a contagion.

Oh, the humanity!

The casual observer will contend that all of those things are already happening. And an informed observer knows that they will continue to do so, regardless of Bernanke's eventual fate.

Don't believe the hype.

The Fed is the root of our economic problems. It has continually created the bubbles and abysmally failed in its mission to control inflation, maintain full employment, and successfully manage both credit and interest rates, which are continually manipulated with devastating consequences.

Bernanke's confirmation would be an endorsement of the status quo, and that is not acceptable.

Fed "Profits" are a Counterfeiting Fraud

Earlier this month, it was reported that the Federal Reserve made record profits in 2009, amounting to $52 billion.

The Fed says it will return $45 billion to the U.S. Treasury — the highest earnings in the central bank's 96-year history.

This is a rather stunning explanation, since the Fed simply prints money out of thin air, and did so to the tune of $142 trillion over the two year period ending in November.

Did that just blow your socks off? That means the money supply more than doubled. In fact, it went up nearly 2 1/2 times, devaluing our money in the process.

This chart is quite staggering.

And that's only what the Fed admits to. But we know that the Fed continually, institutionally, and pathologically lies.

The U.S. Treasury sold more than $2.1 trillion in Treasury bonds and notes last year, much of it bought by the Fed with it's freshly created funny money.

By the end of 2009, the Fed owned $1.8 trillion in U.S. government debt and mortgage-related securities, up from $497 billion a year earlier.

The whole thing is a charade. The Fed prints money backed by nothing and calls it a profit. This is ridiculous to the point of absurd. These are not earnings. It is manipulation, a smoke and mirrors campaign.

The Fed is referred to as a quasi government/private hybrid. But it acts entirely as a private enterprise, not a government agency.

What other government agency buys government debt? The State Department? The Labor Department? Education? Housing and Urban Development?

The answer is no, no, no, and no. That's because it would amount to a shell game, a ruse of borrowing from Peter to pay Peter.

Fed profits are nothing more than a lie. It's the same thing as "loaning" yourself money and calling it earnings, or profit.

When all of this money is brought into creation without a corresponding increase in goods and/or labor, inflation ultimately results.

Inflation is simply the increase of the money supply. That has occurred at an alarming and unprecedented rate. The subsequent increase in prices, most commonly viewed as "inflation" by the media and general public, is only a matter of time.

Hundreds of years of history prove this. It's happened over and over again, around the world.

The Fed's actions amount to larceny and counterfeiting on a massive scale. It is criminal activity by a criminal enterprise.

And we should never forget that. It's more evidence that the Fed's and government's books are cooked, and that neither can be trusted for honesty or objectivity.

There will be an enormous price to be paid. Our money is being devalue and, ultimately, that's all inflation really is.

All of this Fed printing will have some rather regrettable associated costs. We need to prepare ourselves for eventual and looming price inflation.

And that will cost us greatly.

Friday, January 22, 2010

Our Corporatocracy Is Now Official

In the 2008 election, Barack Obama and John McCain combined to spend about $1 billion. And the combined expenditures of the entire 2008 cycle came to a record-shattering $5.3 billion in spending by candidates, political parties and interest groups on the congressional and presidential races.

But with the Supreme Court's latest ruling on corporate financing of federal campaigns, that tally will amount to a mere pittance. The floodgates have officially been opened.

And how did the Supreme Court arrive at its ruling?

Well, according to the Court, a humongous, multi-billion dollar corporation is the equivalent of a single, individual citizen.

Go figure.

At least one justice disagrees, quite sensibly.

"Corporations are not human beings... corporations have no consciences, no beliefs, no feelings, no thoughts, no desires.... they are not themselves members of 'We the People' by whom and for whom our Constitution was established." — Justice John Paul Stevens

What we as a nation have to face is that the last plank of democracy has been shattered.

We are now officially a corporatocracy.

Friday, January 15, 2010

A World Upside Down: on Wall St., Down is Up and Bad is Good

JP Morgan Chase was the first big bank to post fourth-quarter results. Revenue fell short of excpectations and the stock fell 87 cents, or 2%, to $43.81.

However, JPMC also reported its profit rose more than four-fold to $3.28 billion in the last three months of 2009.

Got that? Revenues were nearly $1 billion below expectations, yet profits were up in a huge way.

How can this rather incongruous pair of events coincide?

For starters, record-low interest rates — set at near zero by the Federal Reserve — have allowed banking companies to profit while lending money at higher rates.

Secondly, the bank's earnings resulted from profits in its investment banking and asset management business, which flourished during the now 10-month-old stock market rally. The New York mega bank brought in billions just through trading in the booming financial markets.

In Wall Street's strange world, the stock market thrives even as the economy remains anemic. Go figure.

Banks reduced lending in 2009 by about 18%, year-over-year. Much of the money that wasn't lent ended up in the stock market, and the returns have been good for Wall St. — so far.

To celebrate, the overly indulgent fat cats at JPMC announced that they will be handing out bonuses totaling $9.3 BILLION to themselves. That amounts to an average bonus of $379,000 for all of JP Morgan's investment bankers, sales staff and traders.

However, despite all of its own good news and great fortune, JP Morgan Chase made some rather grim projections for larger economy, warning that defaults on mortgages and other loans may not have yet peaked. The Wall St. giant also said it remains cautious about the potential for a second downturn in the economy.

Part of that may be due to the fact that the bank lost $306 million during the fourth quarter in its credit card services business, and predicted losses will remain elevated in the first half of 2010.

So, in summary: JPMC's revenues fell short of expectations, and its stock priced dropped. But profits were way up, allowing for bonuses nearly four-fold higher than last year. The stock market is booming. But the overall economy remains feeble. Looking forward, the projections for the economy aren't good and a second downturn may loom.

So, there's good news for JP Morgan and its Wall St. cronies, and lots of bad news for the rest of America.

Is your cup half full, or half empty?

Wednesday, January 13, 2010

Debt Market Collapse Could Worsen in 2010

The debt-securitization markets have been the source of roughly 60 percent of all credit in the United States in recent years. These markets finance corporate loans, home mortgages, student loans and more.

The private securities market — backed by home mortgages — has collapsed, from $744 billion at the peak of the housing boom in 2005, to $8 billion during the first half of 2009.

Many of these markets have been operating only because the government is propping them up. And now the Fed has put them on notice that it plans to withdraw its support this spring.

The hope is that private investors will return to the markets, which they abandoned during the financial crisis.

The government has since spent more than $1 trillion trying to restore the markets. So what happens when it finally extricates itself?

The Fed is virtually the only buyer for mortgage-backed securities, purchasing about 80 to 85 percent of the market.

As it stands, banks are not lending. And later this year, they face accounting rule changes and capital requirements that could further restrict their ability to make loans.

As a result, much will be revealed this spring, and throughout the year. The worst may lie ahead.

The Fed’s trillion-dollar intervention got it a mess of toxic mortgage securities. And it refuses to reveal exactly what it paid for them and from whom they bought them.

Removing these toxic mortgages from bank balance sheets recapitalized and reinvigorated both the banks and markets, allowing home-mortgage rates to remain low for both purchases and refinancing. Most of those mortgages are guaranteed by US taxpayers through the tanking mortgage giants Fannie Mae and Freddie Mac.

In addition, the Fed has maintained artificially low interest rates of nearly zero for an extended period. That, combined with the government's home buyer credits, may simply being re-inflating the housing bubble all over again.

When the government support finally ends, and when interest eventually go up (which they indeed will), home prices will fall even further as inventories increase.

The government expects foreclosures and losses in the housing sector to be so large that it recently removed the $400 billion cap on bailout money to Fannie and Freddie. That is an alarm signal by the Treasury about what lies ahead.

This year will lead to further turmoil in the mortgage and other debt markets. The government support will end, and there is no other entity that can sustain these markets. Credit has dried up, and will continue to do so.

Banks reduced lending in 2009 by about 18%, year-over-year. All indications point to a continuation of this trend in 2010.

Instead of lending, banks have pumped up the stock and bond markets with oodles of speculative cash fed to them by the government.

And as the nation has witnessed with great distress, what goes up eventually comes back down.

Saturday, January 09, 2010

Is China's Growth an Illusion?

"China is Dubai times 1,000 — or worse.” — James Chanos, founder and President of Kynikos Associates

There are quite a few economists and academics who question China's rapid and astounding growth, among them Bob Chapman, Gordon Chang, Richard Duncan, Jim Grant and Jim Chanos, a millionaire hedge fund manager.

After all, China's 8% GDP growth is quite remarkable in these times of worldwide economic contraction.

The problem is that, with a totalitarian government, how can you believe any of their "official" data? You can't even believe U.S.government data, so how can you put any faith in China's?

There is so much contradictory information regarding China.

New data this week show China continuing its ascent into economic superpower status, rising above Germany as the world’s top exporter and overtaking the U.S. in domestic auto sales.

However, the IMF says China is #100 among world nations in per capita income; the CIA says China is #106.

China has considerable problems: One billion of its citizens are still peasants. It has one-fifth of the world's population and it has to feed all those people. Much of it's landscape is an ecological wasteland and an environmental disaster.

With worldwide consumer demand continuing its long decline, China appears at risk of overproducing goods that no one wants.

"Demand in China is over-inflated, that is clear," says Chanos.

And bank lending is estimated to have doubled last year from 2008. That, combined with enormous flows of speculative foreign capital into China, may have created enormous asset bubbles.

If China tanks, we can only hope that the era, and the widely accepted policy, of speculation and debt will finally come to an undignified end.

“Bubbles are best identified by credit excesses, not valuation excesses. And there’s no bigger credit excess than in China,” says Chanos.

Tuesday, January 05, 2010

The Christmas Surprise, aka The Christmas Heist

Call it the Christmas surprise.

The Treasury Department announced it had removed the $400 billion financial cap on the money it will provide to mortgage giants Fannie Mae and Freddie Mac to keep them afloat.

Taxpayers have already shelled out $111 billion to the pair. Now there is no end in sight.

A senior Treasury official said losses are not expected to exceed the government's estimate last summer of $170 billion over 10 years.

However, the government has not been accurate, or forthcoming, about the true scope of the problem or about the reality of potential losses.

At this point, we should not believe any government estimates or claims.

It's important for us to reflect on the fact that in July 2008, the Congressional Budget Office said that the government rescue of Fannie and Freddie would cost $25 billion, at most.

The Budget Office said there was a better than even chance that the rescue package would not even be needed before the end of 2009 and would not cost taxpayers any money.

Instead, what has happened is that losses have been so spectacular that the $400 billion cap was quietly removed on Christmas Eve, a traditionally slow news day when most Americans were busy celebrating the Christmas holiday and not paying attention.

The Treasury made the change before year-end to avoid having to ask Congress for another bailout, which would be politically risky in the 2010 election year.

It's also worth noting that the head of the CBO at the time was Peter Orszag, who is now White House Budget Director. What this proves is that being wildly incompetent, or grossly misleading, is actually rewarded.

Bert Ely, a banking consultant in Alexandria, Virginia, said that lifting the cap raises significant concerns and could spell big trouble ahead.

"The companies are nowhere close to using the $400 billion they had before, so why do this now? It's possible we may see some horrendous numbers for the fourth quarter and, thus 2009, and Treasury wants to calm the markets."

Exactly. Sudden moves of such magnitude don't occur in a vacuum. The government clearly knows what's coming and it is preparing for a tsunami of losses.

Without government aid, the two firms would have already gone under, leaving millions of people unable to get a mortgage.

Together, Fannie Mae and Freddie Mac own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages.

The combination of high unemployment, adjustable-rate mortgages that will reset this year, and a likely increase in mortgage rates, will all combine to result in further foreclosures this year.

Currently, there are 2.8 million active interest-only loans nationally, worth a combined total of $908 billion. This year, about $70 billion of interest-only loans will reset. That will result in a massive number of additional defaults.

If the news of unlimited taxpayer support isn't disturbing enough, here's something additionally outrageous: The CEOs of Fannie and Freddie could get paid as much as $6 million apiece for 2009, despite the companies' dismal performances last year.

How's that for justice?

What's clear is that there is no justice. Bankers and lenders have created a "heads I win, tails you lose" environment, and our government has aided and abetted them.

This is no moral hazard anymore. There are no consequences for poor decision-making. There are only private gains and public losses. A government-backed, corporate socialism has arisen in modern America. This is not true, democratic capitalism.

All this latest news should do is lessen America's already diminished view of our government, its competence, and its truthfulness. The government's loss estimates have proven to be wildly inaccurate.

The reality is that without the huge government subsidization of the US housing market through Fannie and Freddie, the enormous housing bubble probably wouldn't have occurred in the first place. The balance sheets of Fannie Mae and Freddie Mac have grown by a stunning $4 trillion.

We, the American taxpayers — including those of us who didn't overextend ourselves, those who bought homes they could actually afford, those who didn't view their home as a financial investment or get-rich-quick scheme, and those who never even bought a home — are all stuck with this gargantuan bill.

It will just be added to the already existing national debt, which will never be successfully paid off. It just keeps growing, and accruing additional interest.

We will remain perpetually in debt, much to our own detriment.

Saturday, January 02, 2010

Populist Bank Reform

Since April, the Big Four banks -- JP Morgan/Chase, Citibank, Bank of America, and Wells Fargo -- all of which took billions in taxpayer money, have cut lending to businesses by $100 billion.

These big, bailed-out banks then spent millions of dollars on lobbying to gut or kill financial reform -- including "too big to fail" legislation and the regulation of the derivatives that played such a huge part in the meltdown.

The five largest US banks control roughly half of the industry's $13.3 trillion in assets. The 8,176 community banks control just 15%.

But local banks often have a positive impact on their communities. So, why not move your money out of one of the big banks and put it into a community bank?

If enough people who have money in one of the Big Four banks move it into smaller, more local, more traditional community banks, then collectively we, the people, will have taken a big step toward re-rigging the financial system so it once again becomes the productive, stable engine for growth it's meant to be.

The FDIC deposit insurance is just as good at small banks as the behemoths.

Watch Eugene Jarecki's amazing video at www.moveyourmoney.info to learn more about how easy it is to move your money. And pass the idea on to your friends (help make this video – and this idea – go viral!).

JP Morgan/Chase, Citi, Wells Fargo, and Bank of America may be "too big to fail" -- but they are not too big to feel the impact of hundreds of thousands of people taking action to change a broken financial and political system.

Let them gamble with their own money, not yours. Let's turn big banks into smaller banks. We'll all be better off – and safer – as a result.